Trump doesn’t trump Canada’s trade opportunities

January 24, 2017

Canada is considered the most trade-dependent G8 nation. There is no denying the important role that trade has played in supporting the growth of Canada’s economy. The United States, along with their allies (including Canada), has been paving the way for more free global trade since the end of the Second World War. However, President Donald Trump is attacking much of what has been the “hallmark of American foreign policy for half a century.”

In 2016, protectionist measures across the world were at their highest since the 2009 financial crisis. The World Trade Organization has made little to no progress over the past few decades in further liberalizing trade and growth in global trade is slowing from double the rate of GDP growth down to roughly even with GDP. With a lack of consensus that further trade liberalization improves welfare, Canada must make specific efforts to gain access to global markets in order to support future growth.

Canada must position itself as one of the best countries for export-oriented production

Despite the uneasiness surrounding global free trade, there are opportunities for Canada. By maintaining access to the US market, putting the Canada-EU Comprehensive Economic and Trade Agreement (CETA) into force, and joining the Regional Comprehensive Economic Partnership (RCEP), Canada could become one of the only countries with preferential access to the eight largest economies in the world. This would position Canada as a great place to invest in for global, export-oriented production.

Access to the US

Trump’s anti-trade agenda may harm other countries more than Canada.

With all the anti-trade rhetoric, it will be interesting to see how Trump engages in trade negotiations with new partners. Canada should strive to maintain access to the US market through either North American Free Trade Agreement (NAFTA) or the Canada-US bilateral agreement (if NAFTA is terminated). There are valid concerns about renegotiating NAFTA, as the deal could disrupt many comprehensive cross-border supply chains. However, since trade between the US and Canada is relatively balanced (each country exports a similar amount to the other), politicians on both sides of the border should strive to maintain the status quo.

On Twitter, Trump has been threatening automotive companies with big import tariffs for moving production to Mexico and exporting their products back into the US (tariff free). Many auto companies are now cancelling their future plans to move production to Mexico, and have stated their intentions to invest in the US. While these South-bound threats may produce fear in Canada, it is less likely that Canada will face the same hostility. Canada is the number one export destination for US vehicles, and Canadian production creates strong demand for US parts as inputs. Disrupting this relationship by dismantling NAFTA would bring hardship to the Great Lakes states that Trump recently won over, as they would have to reorganize their business relationships to work around tariffs and other restrictions.

Across the Atlantic, CETA could provide Canada with preferential access to an additional 22 percent of the global economy. Canada has ratified the deal and the EU Parliament will be voting on it in early February of this year. The US and the EU have been working on their own bilateral agreement, the Transatlantic Trade and Investment Partnership (TTIP). At the moment as it stands, CETA is much further along than the TTIP.

Access to Asia-Pacific

With the TPP off the table, Canada must look to the RCEP.

Canada is part of the Trans-Pacific Partnership (TPP) agreement, which seeks to boost trade and investment across 12 nations, representing 40 percent of the global economy. Trump, however, has vowed to back out of the TPP on his first day in office. Without the US, the TPP is essentially off the table, and Canada must look to the RCEP being put forward by the 10 ASEAN countries, as well as China, India, Japan, South Korea, Australia, and New Zealand.[1] The RCEP covers a population of 3.4 billion and roughly 30 percent of global GDP. Within the region, Canada has a free trade agreement with South Korea and is in negotiations and exploratory discussions with a number of other countries on the list.

The RCEP is more of a traditional trade agreement, which seeks to further reduce tariffs and other non-tariff barriers to trade, but is less ambitious in areas that the TPP was focused on (such as government procurement, state-owned enterprises, investor-state dispute settlement, intellectual property rights, among other things that are often contentious and limit governments’ ability to implement policy). Negotiations are intensifying and parties are keen on having the pact finalised by the end of 2017. The RCEP is being negotiated amongst the original members, but the group is open to allowing others to join. If Canada were to join the RCEP, and if the CETA were to come into force, Canada would go from having free trade agreements with 31 percent of the global economy today, to 82 percent. While the RCEP is different in scope than the TPP, it nevertheless offers Canada an opportunity to gain access to the large and growing Asia-Pacific region.

By looking South across the 49th parallel, East over the Atlantic, and West over the Pacific, Canada has the potential to position itself at the centre of the global economy.